I am an e-Money researcher and crypto economist focused on expanding the circulation of nonpolitical digital currencies. My career has included senior influential posts at Sumitomo Bank, VISA, VeriSign, and Hushmail. Currently, I serve on the Board of Directors for the Bitcoin Foundation.

My Answer To A VC's Bitcoin Question

Fred Wilson is a venture capitalist and principal of Union Square Ventures. On his popular blog, he recently solicited feedback (for the second time) on the bitcoin cryptocurrency. I was tempted to reply directly on the blog, but with over 400 comments posted already I did not want to be lost in the scroll.

My reply is directed first at Fred for sparking the discussion but also to those many other investors pondering bitcoin deals. Throughout, I will refer to bitcoin investments as investment in bitcoin-related deals as opposed to a direct investment in the currency itself which an entirely different business proposition.

Let’s get some basics out of the way. First of all, an investment in a bitcoin entity will be a gut-wrenching, difficult investment to make if a particular VC has an inherent fundamental belief in any of the following: (1) the cashless society as promoted by the anti-cashists; (2) capital controls enforced at national borders; (3) the appropriateness of any government monetary policy; and (4) the taxation of income.

For a VC, this can be a soul-searching exercise. But it does not mean that the decentralized digital currency is political by nature. It means that through its cryptographic nature bitcoin reduces the monetary Statist to irrelevancy. Bitcoin has some pretty powerful and disruptive byproducts.

With optional, user-defined transaction privacy, the use of money for purposes of identity linking falls by the wayside. True, it enables a paper cashless society but not with the attributes that the tax-efficient anti-cashists want. Without government checkpoints for financial institution wire transfers, bitcoin capital flows freely, without limits, and perhaps anonymously. The harmful tools of centralized monetary policy would also not exist. And finally, the taxation of income that began in the United States in 1913 would operate on the honor system — the honor of the taxpayer, that is. This could be welcome news for some as a progressive income tax was a fundamental tenet of Marxism.

In his first post, Fred mentioned “the emergence of currencies that are not controlled by nation states in my lifetime.” He clearly acknowledges that significant ramifications result from the “decoupling of currencies from governments,” but I wonder if he has come to terms with what that actually means.

What sounds cool and hip because it is technologically advanced can also turn a lifetime of engrained political assumptions on its head. If a VC happens to believe that Greece’s problems can be solved by eliminating anonymous paper cash transactions and that the taxation of income is morally justified, how does he reconcile that with bitcoin dominance?

Definitely not for the faint of heart, those skilled and experienced venture capitalists entering the arena will be playing with fire. This is not a game of targeting an app and throwing seed money at developers located in Silicon Valley or Silicon Alley. Nor is it like catching the social media wave or jumping on the mobile payments bandwagon.

Bitcoin is the quintessential disruptor for not only does it disrupt established primary-level players in the field of payments, like VISA, Mastercard, and PayPal, but it disrupts the very nature of monetary authority. Bitcoin is disruption within supreme disruption.

Failing to recognize this maxim, especially as a venture capital investor, can be fraught with pitfalls. Regulatory acquiescence will be tempting, but counter-productive. In a company’s strategic plan, relegation of bitcoin to just another national currency type among equals fails to exploit its incredible transformative properties. The venture capitalist could become boxed in by the lack of courage to set legal precedent, by the unwillingness to go overseas, or even by the reluctance of the board. To be fair, there will be VC plays in the regulation-friendly exchange space and processor space but they won’t be the home runs!

The home runs will be transformative and that just may not be possible for a NewCo in all countries. I maintain that it is more a game of multiple jurisdictions that leverages the relative strengths of competing legal jurisdictions for the best foot into the global infrastructure.

Gibraltar made an early, and deliberate, strategic decision to embrace and promote the online gambling business. They executed it brilliantly and Gibraltar is now home to the industry’s leaders like publicly-traded bwin.party [BPTY:London]. Just as with online gambling, some jurisdictions around the world will be more bitcoin-friendly than others. Negotiating that outcome is the real frontier.

Many readers have commented and agreed that the investment opportunities will revolve around bitcoin-related services more than any type of client software play or attempt to control the mining and transaction fees. While I generally agree, I also think that a new company does not have to be bitcoin focused exclusively.

Also, keeping bitcoin value in bitcoin on the block chain will be the key. It may be an opportunity that moves significantly beyond an existing business model simply by having bitcoin in its arsenal. For example, a third-world e-commerce platform could bring massive shopping to the unbanked by leveraging the non-national and frictionless attributes of bitcoin. Or, asset vehicles could be designed that transfer inter-generational wealth without the need for trusts or trust administrators.

So, my advice to VCs seeking their piece of the block chain is study the FATF blacklist of 15 non-cooperative countries, go to airports you never heard of, and most importantly, surround yourself with management teams that mentally embrace bitcoin’s powerful derivative byproducts.

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.

I think it’s misleading to say Bitcoin is incompatible with income tax, for several reasons:

1) Most people get their income from a salary, and companies already can/do tell tax collectors directly how much they are paying you.

2) It’s possible to implement tax collection schemes for things like sales taxes with Bitcoin, by incentivizing purchasers to report transactions. For businesses that get their income from sales to people or other businesses, that income can therefore also be tracked.

Our company has been ‘lurking’ on the periphery of the Bitcoin space since last summer. Our initial concerns, as a payment processor, revolved around potential fraud (such as that which hit the Tradehill/Dwolla relationship last year) and the compliance issues of AML/KYC.

After 11 months of ‘homework’, we have entered into what we feel will be an amazing relationship with a Bitcoin processor that seems to be setting a new standard within the Bitcoin community by providing a fully compliant platform.

After all of the time spent in research, and in working with some of the key entrepreneurs that shaping the next generation of Bitcoin platforms, it seems a shame that it still seems to be known more as an anonymous underground ‘currency’, rather than the international alternative payment method that it seems to be growing into.

ECommerce is focused mainly on credit cards, but the truth is that only a small % of the world’s population is credit-card centric. Bitcoins is a way to possibly level that playing field, by providing a truly global exchange medium for anyone to use.

I don’t know where this will go, or how it will all wind up – but I know from first hand experience that there are many in the community that are not at all concerned with hiding their identity or buying illegal/illicit goods – they simply want to build the proverbial ‘better mousetrap’.

Is it Bitcoin? I don’t know yet – but we plan to see what we can do to help it along!

I wish you luck on your endeavor. Bitcoin is not about hiding your identity or buying illicit goods. People do that every day with paper Federal Reserve Notes. For bitcoin to evolve into the international alternative payment method that you speak of, your bitcoin processor may have to adjust their business practices or suspend their business practices altogether to be in full compliance. In fact, the bitcoin processor may not be around because they were in the ‘wrong’ legal jurisdiction.

I am speaking about the economic byproducts of a decentralized bitcoin and for a bitcoin VC or a bitcoin entrepreneur to ignore those is naïve at best and catastrophic at worst. Unfortunately, you don’t get to decide how bitcoin is used.

Jon – I can’t give out too many details yet – but the background of the people involved in the project is strong – decades of payments compliance background in highly regulated, high risk verticals. Licensed MSBs with a strong understanding of what we need to do, and what we cannot do.

No one is jumping in ‘headfirst’ – in fact, the reason for the new separate product is to provide our processing partners the ability to choose whether or not they want to be involved, and to mitigate any potential risk to our existing platform and it’s merchants.

While we don’t get to decide how Bitcoin is used – we DO get to decide who gets to use our platform, and that, ultimately, will have a great deal of effect on how it is used in the long run.

Jon, not all people using Bitcoin are American, maybe you should look at Bitcoin from a Russian or Somali point of view. Second all the companies you mentioned like Visa, PayPal and Mastercard do have 3 things in common, first they are all American, second they are all monopolies and third they are all data miner, data collector and data scraper. I as an non American does not necessarily want to give all my personal information to one of this companies, they might decide one day I am an terrorist and there is nothing I can do about this. This companies you mentioned made enough money and I am sure in future will still make enough with or without the Bitcoin. So don’t be so negative about the Bitcoin it almost sounds if you where sponsored by one of them. All the best Trader

If governments can no longer tax transactions, and an income tax is an example of this category, then they will switch to something they can tax, namely assets.

Asset taxes already exist, the ones on real property at the state and local level in the US being a prominent example. So when I say “no longer tax” above, it is not a binary either-or situation. To the extent transaction taxes fail to satisfy their appetite for revenues, governments will shift more heavily to other forms like assets.

For those activities deemed illicit, seizure amounts to a 100% tax on assets the government can find, and the IRS already seizes assets when they feel income taxes are deficient. So the tools are already in place, and await sufficient need to be used more heavily.

Ya’all are fucking retarded. Bitcoin only has value until the major governments become vigilant about shutting it down. It’s a pipe dream. The only thing you should be betting on is how soon a major government will shut it down.